As pointed out in the Peru Law & Practice chapter in the 2021 edition of this guide, the number of M&A transactions in Peru for 2021 has increased by approximately 15% and the total aggregate value by close to 200%.
This is mainly due to (i) light at the end of the tunnel regarding the status of the global pandemic, and (ii) the political instability caused by the 2021 presidential elections winding down.
Additionally, it is expected that M&A transactions will increase throughout the year, particularly in sectors with low sensitivity to political instability and the pandemic, such as agriculture, retail and technology.
As stated in 1.1 M&A Market, M&A transactions have steadily increased throughout 2021. Those transactions that have been executed have focused on finance, agriculture, telecommunications and retail.
The Peruvian M&A market, as it has done for the last few years, continues to become more sophisticated, which is definitely attracting the attention of foreign investors.
Venture capital is continuously growing as expected and, as such, M&A activity relating to it is imminent, especially in the fintech sector in Peru.
In terms of transactions, most of the deals in the past year have been in the finance, retail, agriculture and telecommunications sectors. Almost all of these have been executed through private sales. Furthermore, the transactions that have occurred in recent quarters (ie, during the pandemic) have been characterised by processes involving local competitors and in industries well known to both buyer and seller.
Several industries have been affected by the COVID-19 pandemic, including tourism, leisure and co-working, as well as the aeronautical, gastronomic and automotive sectors.
A great deal of the M&A transactions in Peru are carried out by private sale and purchase agreements, by a private tender process or through public offerings. Each type of acquisition has its own particular characteristics.
In a private sale, negotiations are generally more straightforward since there is no competition for the deal. In this process, a standard term sheet is executed, a due diligence process is carried out, and then a purchase agreement (which is generally drafted by the buyer) is negotiated and executed.
In a tender process, an investment bank is typically involved and takes care of the details. These types of negotiations are usually more sophisticated and more difficult to negotiate. Through this process, different investors are invited to participate. Every single actor is given the tender regulations, and each submits a bid, which should include amendments to the transaction documents.
In tender offers involving a listed company, the transaction will have to go through a regulated proceeding supervised by the Securities Regulator (Superintendencia del Mercado de Valores). This type of transactions is normally executed once a buyer acquires a significant participation in the target, as further discussed in 4.1 Principal Stakebuilding Strategies.
The most relevant new regulatory player in the M&A market is the National Institute for the Defence of Competition and the Protection of Intellectual Property (Indecopi), which is in charge of correctly executing the provisions of the Economic Concentration Control Law, as detailed in 3.1 Significant Court Decisions or Legal Developments.
Additionally, the Securities Regulator is an active participant in transactions that involve listed target entities. The Securities Regulator is in charge of regulating the Peruvian capital market. Its main objectives are to ensure the protection of investors, the efficiency and transparency of the markets under its supervision and correct pricing.
Another important regulator is the Superintendence of Banking, Insurance and Pension Funds (SBS). Its main objective is to protect the interests of the public by assuring the stability, solvency and transparency of entities under its supervision. As such, it is in charge of regulating and supervising financial institutions, insurance entities and pension funds, among others. The SBS participates in transactions since the transfer of 10% or more of a financial institution or insurance entity to a sole entity requires its prior authorisation.
Finally, there may be other sector-specific regulators depending on the industry to which the parties belong, such as the mining, fishing, energy, telecommunications and aeronautical sectors.
The general rule in Peruvian regulation dictates that foreign investment does not require prior authorisation from the government. Nonetheless, there are some limitations regarding certain economic sectors such as:
Nevertheless, Peru is considered as a friendly country for foreign investment. That can be concluded from the over USD25 billion injected into the country through foreign investment.
Please refer to 3.1 Significant Court Decisions or Legal Developments for discussion of Peruvian antitrust regulation.
Labour due diligence is very important within M&A transactions in Peru since Peruvian labour regulation tends to be more pro employee than, for example, its US equivalent. Below are the most relevant regulations that acquirers must be concerned with when considering a Peruvian transaction.
One of the most important labour principles, is the continuity principle. This principle states that employees are transferred with the same labour conditions before the corporate acquisition or merger was agreed. There are two ways to comply with this principle. The first option is to execute an agreement between the merging company, the merged company and the employee. Such an agreement shall be filed before the labour authority. Finally, if the employee does not want to be transferred, the merging company is allowed to dismiss them. The second option is that the merging company hires the employee under a new labour agreement. Nonetheless, in this case, the merged company and the employee must terminate the existing labour agreement and the employee shall receive all the corresponding labour benefits of that termination.
Peruvian regulation states that different types of agreement can be used in different types of labour scenario. As such, it is important to correctly review the activities executed by the workers and the type of agreement that defines their labour relationship. That said, Peruvian regulation does not state mandatory minimum clauses for a labour agreement, the parties can regulate their rights and obligations and include benefits other than those established by law.
Overtime and Assistance Control
Overtime has to be duly compensated according to Peruvian law. Additionally, there has to be an assistance control in order to determine if overtime is needed.
It is important to ensure that compensation packages include all the corresponding benefits established by law.
Health and Safety Regulations
Health and safety regulations oblige entities to comply with certain conditions that must be implemented in the workplace. Hefty fines can be applied if these conditions are not met.
Peruvian regulation states that employees can only be dismissed by fair reasons that are legally established.
Foreigners (either individuals or companies) cannot acquire or possess any interest in mines, lands, forests, water, fuels, or energy sources, directly or indirectly, within 50 kilometres of the Peruvian border. If the latter provisions are breached, the foreign individual or company may lose any right or interest therein.
As such, foreigners cannot acquire (even through a Peruvian subsidiary) entities or assets that are located within 50 kilometres from the Peruvian borders.
The Peruvian government can make exceptions when it considers that the transaction is of national interest. In the latter scenario the foreign party will have to file an exception request which will be evaluated by the corresponding authorities.
In general terms, regulations have been very consistent over the last three years. However, Latin America has experienced an increasing trend towards antitrust regulation in the last decade. On 7 January 2021, Law 31112 (Merger Control Law) was published and, on 4 March 2021, its accompanying Merger Control Regulations were published, establishing the prior control of business concentration operations.
The purpose of the Merger Control Law and its Regulations is to establish a prior control regime for business concentration operations in order to promote effective competition and economic efficiency in the market, for the welfare of consumers.
Business Concentration Operations
In accordance with the Merger Control Law, prior control will be applicable to those acts of economic concentration that produce effects in all or part of the national territory. This includes those acts that are carried out abroad and directly or indirectly link economic agents that carry out economic activities in the country.
Thus, acts or operations that imply a transfer or change of control of a company or part of it will be considered as economic concentration operations. These operations may occur as a consequence of:
Thresholds to Which a Business Concentration Operation Must Be Subject
For a business concentration operation to be subject to the prior control procedure, the following thresholds must be met concurrently:
Notwithstanding the foregoing, the National Institute for the Defence of Competition and the Protection of Intellectual Property (Indecopi) – as long as this is justified and is in accordance with the provisions of the Merger Control Law – may propose updates tot these thresholds.
Regarding the aforementioned thresholds, the Merger Control Regulation has specified that their calculation will be made taking into consideration one of the following parameters: (i) the value of sales or gross income generated in Peru, or (ii) the book value of assets located in Peru. In addition to the above, the Regulations have established the rules for the calculation of the referred values.
Process of Approval
If the conditions described above are met, the economic agents involved in the operation must file an application for authorisation before INDECOPI and follow the procedures stated in the Merger Control Law and the Regulations.
Ex Officio Action by Indecopi and Voluntary Notification
The Technical Secretariat of Indecopi (the Technical Secretariat) may act ex officio when there are reasonable indications that allow it to consider that a concentration operation could generate a dominant position or affect effective competition in the relevant market.
For their part, the companies involved in a business concentration operation that do not reach the thresholds established by the Merger Control Law, may voluntarily notify that concentration.
The Merger Control Law divides offences into the categories of minor, serious and very serious, specifying that the scale of fines provided for in the Law for the Repression of Anticompetitive Conduct, approved by Legislative Decree 1034, will be applicable.
Likewise, the Merger Control Law contemplates the possibility of Indecopi ordering corrective measures to restore the proper development of the market, among which are the dissolution of the business concentration or the sale of all the shares or assets acquired.
Entry into Force
The Merger Control Law entered into force on 14 June 2021.
There have not been any significant changes to takeover law in the past 12 months and it is not under review in a way that could result in significant changes in the coming 12 months.
It is customary for a bidder to build a stake in the target prior to launching an offer
Additional to the approval of Indecopi (if applicable), a transaction that involves a public target must be authorised by the Securities Regulator when:
Having said that, it is possible to build a stake before acquiring an amount that will lead to the bidder having significant participation when the acquisition:
The most common options to build a stake before launching an offer are indirect acquisitions and executing them through one act
When M&A transactions are executed within the scope of a private transaction, they do not have to comply with shareholding disclosure or filing. Furthermore, they do not need to be filed before the Securities Regulator.
If the transaction involves a listed company, there are several filing obligations and thresholds that must be complied with. As such, regarding filing obligations, the entity that launches the tender offer must:
Such notification must include the prospectus, which describes the offer and all relevant information, in order to execute the possible transaction. The prospectus shall include, among other information, the following.
Finally, the target entity will have to inform the Securities Regulator of any transfer of its shares made by any person who holds (directly or indirectly) 10% or more of the share capital, or of any person who buys or sells 10% or more of the share capital of the listed target entity.
Shareholders may include different reporting thresholds in their shareholders’ agreements, nonetheless, incorporating the latter in the company’s by-laws is not common.
Dealings in derivatives are allowed under Peruvian regulations.
The corresponding issuers must file their derivatives before the Securities Regulator as long as all the amounts of the derivatives equal, or are greater than, 5% of its total debt or 3% of its operational income in the previous three months. In the latter scenario, the issuer must submit the details of each derivative transaction within the first ten days of each month.
Shareholders have to make known the purpose of their acquisition and their intention regarding control of the listed entity. Such information must be included in the prospectus, which according to Peruvian regulation must be available to interested parties. Specifically, the prospectus shall include the purpose of the acquisition and future plans, such as:
Non-listed companies are not required to disclose a deal to the public. Nonetheless, once the transaction is executed, they must inform the Peruvian Tax Authority about the shareholder change.
Additionally, companies that are listed are obliged to report relevant matters (hechos de importancia) to the Securities Regulator as soon as the relevant matter occurs or when the entity becomes aware of the circumstances.
It is understood that listed entities become aware of a certain situation when:
Relevant matters are defined as every act, decision, negotiation, agreement or piece of information related to a listed entity, its securities or its business operations, that can significantly influence the decision of an investor to buy, sell or keep securities or could influence the price of the securities issued. As such, the plans of an entity to acquire a majority or controlling stake of another entity and the initiation of a due diligence process are examples of relevant matters that must be reported to the Securities Regulator
Companies must comply with legal requirements regarding the timing of disclosure.
We have seen a lot of due diligence processes during the current COVID-19 pandemic; however, due diligence processes have not been particularly impacted by the COVID-19 pandemic. Peruvian legal due diligence processes are very similar to the standard international legal due diligence processes.
As usual, the due diligence process requires searching and collecting relevant information that will be used to determine the level of legal contingencies in a potential transaction.
Due diligence focuses on a few key aspects in M&A, as set out below.
Whether all corporate documentation is duly updated, and whether there are any limitations to share transfers/changes of control should be determined. Additionally, the status of the corporate information is a general indicator of how well organised the target is.
Even though this aspect of due diligence generally depends on the type of company and industry, it is very important to review labour matters since they are often a factor in Peruvian transactions. In labour due diligence, labour information – such us the list of employees and their benefits, terminated employee plans, labour claims and employment contract regimes – are reviewed in order to assure the target has been complying with the applicable law. Additionally, collective bargaining agreements entered into between unions and targets are also reviewed. Nonetheless, unions are not very common in Peru.
The aforementioned review is important since Peruvian labour regulation is very protective of the employee and, as such, can considerably affect the new owner if the target has not complied with all requirements.
This is normally the most important matter reviewed in Peruvian due diligence since it is probably the most contingent aspect under Peruvian regulation. Normally, all tax returns are reviewed in order to assure that the entity is complying with its tax obligations. Furthermore, any tax disputes, claims, and past or present audits are also reviewed since the tax contingencies statute of limitations is four years if tax returns are presented and six years if the target did not file its tax returns.
International bidders must be very careful of where they allocate their investments, especially since Foreign Corrupt Practices Act (FCPA) regulation is very strict. As such, it is important to carry out a criminal-and-judicial-processes search in the Peruvian courts to confirm whether there is any kind of investigation that could hinder the possibility of investments (eg, a money laundering investigation).
Depending on the industry sector of the target, all licences, authorisations and/or concessions are reviewed to ensure that the target is legally allowed to execute its activities.
If the target owns real estate, it is important to ensure that all acquisition documents relating to that property were correctly executed. This way the bidder will ensure that the target is the owner of the real estate.
It is important to review all administrative, judicial and arbitration procedures to calculate their possible contingencies. Furthermore, litigation due diligence also reviews possible claims, lawsuits or arbitrations regarding a claim against the company.
Exclusivity clauses are normally requested by buyers in order to protect the transaction. This will prevent other possible buyers from negotiating deals for a specific timeframe. Additionally, it is common that sellers request to add a “drop-dead” date in order to be able to terminate any negotiation after a specific date.
Standstills are not very common in Peru. If utilised, they are requested by sellers in order to prevent the buyer from bypassing the negotiations and proceeding to acquire on the open market or through offers made directly to target shareholders.
Definitive agreements are not used in Peru for tender offers. The terms and conditions that would normally be included in a definitive agreement are included in the corresponding transaction prospectus.
Transactions timings and processes vary substantially from case to case depending on the specifics of each transaction. To make a broad generalisation regarding timing, Peruvian transactions usually take between three to nine months as of the moment the legal team is involved. Bear in mind that it is common in Peru for purchasers and target companies to have already spent relevant time discussing target value and financial structuring before involving legal counsel.
The economic instability created by the COVID-19 lockdowns did create several practical delays to the deal-closing process, nonetheless, such hurdles were overcome once the lockdowns were lifted.
Offer thresholds will depend on whether the tender offer is launched before or after acquiring a significant number of shares in the target company. An offer threshold will apply if the bidder acquires shares in the target entity before issuing the tender offer. The threshold is calculated as (X/Y) x (1-Z), where:
It is important to note that offer thresholds will not apply if the offer is issued before acquiring shares in the target entity.
Cash consideration is more commonly used than shares in Peru; unlike in international markets, share considerations are quite uncommon in Peru. Some transactions in the country have used both, although these are exceptions.
Some common tools used to bridge value gaps between the parties in a deal environment or industry with high valuation uncertainty include structures where the purchaser bases company valuation on performance and those performance targets are placed before the seller’s executives. Another common way to bridge the gaps where there is valuation uncertainty is to redefine share par value and, if this is triggered, the purchaser has the right to obtain more shares than initially bought; this is particularly useful when acquiring only a percentage of a company and when the seller remains as shareholder. Some other mechanisms include escrow and guarantee structures.
In private transactions, offer conditions are allowed and are not restricted. These offers normally include the following.
Usually, offers are targeted at acquiring shares that represent at least 66% of the share structure. The latter because with 66% of the shares, the buyer will have complete control of the target entity.
Regarding the level of conditionality in M&A transactions in Peru, mandatory and suspensory regulatory conditions are very common in negotiations. Offers are generally conditioned on the bidder being able to obtain financing (generally through capital calls). It is also common to have other conditions such as third-party consents and shareholder approvals if they are applicable, nonetheless, the latter do not tend to cause any problem in transactions (at least not in the final stages of the transaction).
Regarding common deal security measures in the international market, typical Peruvian practice dictates that some are routinely used while others are not.
Force-the-vote provisions are not used in Peru since it is the shareholders that have the final decision and not the board of directors.
Additionally, there have not been new specific contractual considerations or tools for managing “pandemic risk” in the interim period, nevertheless, there is a greater tendency to be conservative in assessing targets, especially in pandemic-sensitive industries.
If a bidder does not seek to obtain 100% ownership of a target, they normally tend to negotiate additional governance rights, which are almost always regulated in a shareholder agreement executed by and between the bidder and the remaining shareholders. The type of additional rights to be negotiated will mostly depend on the share stake the bidder aims to hold, but the most commonly negotiated rights are the following.
These types of rights are more common when the bidder buys less than 66% of the shares of the entity, since the provisions of the Peruvian Corporate Law state that a majority shareholder that holds at least 66% of the shares of an entity has control over most of the decisions of that company.
If the relevant entity’s by-laws allow it, shareholders may vote by proxy in Peru.
Even though squeeze-out mechanisms and short form mergers are fairly common in international markets, there is no similar mechanism in Peru that would allow the buying-out of shareholders who have not sold their stocks following a successful tender offer. The only way to buy out the shareholders would be if they agree to sell, or if they had agreed to a call option with the bidder.
This type of negotiation is more common when the bidder buys less than 66% of the shares of the entity, since the provisions of the Peruvian Corporate Law state that a majority shareholder that holds at least 66% of the shares of an entity, has control over most decisions of that entity.
It is very uncommon to obtain irrevocable commitments to tender or vote from the principal shareholders of a target entity.
From a target perspective, and as stated in Peruvian regulation, companies that are listed are obliged to report relevant matters (hechos de importancia) to the Securities Regulator as soon as they occur and never later than when the entity becomes aware of the relevant circumstances. Listed entities are understood to have knowledge of the situation when:
Plans for an entity acquiring a majority or controlling stake in another entity and the initiation of a due diligence process are considered relevant matters that must be reported to the Securities Regulator.
On the other hand, once bidders officially file the tender offer before the Securities Regulator, they shall make available, to any interested party, free copies of the prospectus. Furthermore, bidders shall be obliged to publish in the Peruvian official gazette and another newspaper with widespread circulation a notice containing the following information:
For an issuance of shares, an entity must disclose the type of shares that will be issued, the number of shares being issued and the value per share.
Disclosure documents submitted by the bidders must contain audited financial statements.
As stated in 7.1 Making a Bid Public, only relevant matters need to be disclosed before the Securities Regulator. As such, the execution of the deal shall be disclosed but not the entirety of the documents’ terms.
The members of the board have a limited role in M&A transactions. They have duty to act as a supporting cast in order to correctly advise the shareholders on their decision. Additionally, they must act neutrally, not taking sides with any particular bidder or party.
Directors generally have a minor role in M&A transactions. As such, special or ad hoc committees are not common.
What is commonly known as the business judgement rule in the USA is not recognised in Peruvian regulations. As such, courts do not defer to the judgement of the board of directors in takeover situations.
The board of directors generally does not participate in a significant way during transactions. Shareholders are normally the ones that take the final decision in transactions.
Nonetheless, if the target company is relatively sophisticated, it is very common that they hire investment bankers for M&A transaction advice.
Conflicts of interest of directors, managers, shareholders and/or advisors have not been the subject of judicial or other scrutiny in Peru.
Hostile takeover offers are permitted in Peru but are very uncommon. Furthermore, buyers do not typically engage in hostile takeover offers since actually controlling the target company can sometimes be much more complicated than owning more than a certain percentage of the shares of the entity. Even though an entity can hold more than 66% of the shares of a target and, as such, control decisions within the company, the rest of shareholders can try to boycott daily operations and affect the company’s results.
Directors have a much more limited role in business combinations in Peru than in other countries of the region. As such, defensive measures per se are not commonly used in Peru. Shareholders are much more empowered and can generally establish the corresponding defence mechanism.
Defensive measures are not usual in M&A transactions in Peru. Mechanisms such as poison pills are not standard in our market.
The current pandemic has not changed the prevalence of various defensive measures.
Defensive measures are not common in Peru. Additionally, shareholders generally have the last word and the board has a lesser role.
The by-laws of an entity can add clauses that allow directors to “just say no”. Nonetheless, generally directors are not empowered to “just say no” and even though they can recommend whether the transaction should be executed, shareholders usually have the ultimate option to execute as they wish.
Peruvian common practice dictates that almost all M&A transaction documents are submitted to arbitral jurisdiction rather than the judiciary. This decision is mostly taken since it takes less time to resolve a dispute though arbitration than through submitting it to the courts, which can take up to seven years to decide on a dispute, depending on the matter.
Litigation in connection with M&A transactions is not very common in Peru. Almost all litigation connected with M&A transactions is centred around the failure or breach of representations, and warranties and covenants established in the transaction documents.
Even though litigation is not very common in Peru, it is usually brought after the transaction has closed. They are generally centred around the failure or breach of representations, and warranties and covenants established in the transaction documents.
Broken deal disputes are very uncommon in the Peruvian market and there has not been a visible increase in them in 2021.
Even though shareholder activism may be usual in other jurisdictions it is not very common in Peru. It has happened in very few cases in relevant transactions in the last five years.
Since shareholder activism is very uncommon in Peru, shareholder activists generally do not encourage companies to enter into M&A transactions, spin-offs or major divestitures and this has not changed due to the pandemic.
Activists will generally not interfere with the completion of the announced transaction. What happens is that they try to seek compensation if they believe that their rights as minority shareholders have been breached.
Peru has seen very few situations where activists have interfered with the completion of an announced transaction, the last important instance of this was in 2015.